Alston & Bird Consumer Finance Blog

State Law

New York DFS to Impose Climate Change Safety and Soundness Expectations on Mortgage Lenders, Servicers, and other Regulated Organizations

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What Happened?

On December 21, 2023, the New York Department of Financial Services (“NYDFS”) published an 18-page guidance document (the “Guidance”) on managing material, financial and operational risks due to climate change. The NYDFS issued the Guidance after considering feedback it received on proposed guidance it issued in December 2022 on the same topic. The Guidance applies to New York State regulated mortgage lenders and servicers, as well as New York State regulated banking organizations, licensed branches and agencies of foreign banking organizations (collectively, “Regulated Organizations”).

Why Is It Important?

The NYDFS has set forth its expectations, replete with examples, for Regulated Organizations to strategically manage climate change-related financial and operational risks and identify necessary actions proportionate to their size, business activities and risk profile.  Such expectations include:

  • Corporate Governance: An organization’s board of directors should establish a risk management framework, including its overall business strategy and risk appetite, which include climate related financial and operational risks, and holding management accountable for implementation. Such framework should be integrated within an organization’s three lines of defense – quality assurance, quality control and internal audit. Recognizing that low and moderate income (“LMI”) communities may be adversely impacted from climate change, the NYDFS expects an organization’s board of directors to direct management to “minimize and affirmatively mitigate disproportionate impacts” which could violate fair lending and other consumer finance laws. On that note, the NYDFS reminds organizations to consider opportunities to mitigate financial risk through financing or investment opportunities which enhance climate resiliency and are eligible for credit under the New York Community Reinvestment Act.
  • Internal Control and Risk Management: Regulated Organizations should also consider and incorporate climate related financial risks when identifying and mitigating all types of risks, including credit, liability, market, legal/compliance risk, and operational and strategic risk. The NYDFS defines financial risks from climate change to include physical risks from more intense weather events as well as transition risks, resulting from “economic and behavior changes driven by policy and regulation, new technology, consumer and investor preferences and changing liability risks.” The NYDFS recognizes that insurance is an important mitigant to climate change risk but cautions that the availability of such insurance in the future is not guaranteed.
  • Data Aggregation and Reporting: Regulated Organizations should establish systems to aggregate data and internally report its efforts to monitor climate related financial risk to facilitate board and senior management decision making. Such organizations also should consider developing and implementing climate scenario analyses.

What Do You Need to Do?

The NYDFS stresses that organizations should not let “uncertainty and data gaps justify inaction.” Although the NYDFS has not issued a timeline for implementation of the Guidance or begun incorporating such expectations into examinations (which will be coordinated with the prudential regulators to align with joint supervisory processes), now is the time to begin integrating climate-related financial and operational risks into your company’s organizational structure, business strategies and risk management operations.  This will help you prepare for when your organization is required to respond to the request for information which the NYDFS anticipates sending out later this year.  It is anticipated that the NYDFS will ask for information on the steps your organization has taken or will take within a specified period to manage financial and operational climate-related risks, including government structure, business strategy, risk management, operational resiliency measures, and metrics to measure risks.

Mortgage Industry Update: Washington DFI Holds First Mortgage Industry Webinar of 2024

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A&B Abstract:

On January 24th, the Washington Department of Financial Institutions (the “DFI”) conducted its first Mortgage Industry Webinar of 2024 and provided updates in the areas of licensing, examination, and enforcement. Highlights from the Webinar are briefly summarized below.

Licensing Update

The DFI provided the following snapshot of licensing activity as of December 31, 2023:

  • Company licenses increased since the prior year.
  • Branch licenses decreased due to authorized remote work by mortgage loan originators (“MLO”).
  • MLO licenses decreased compared to previous years.
  • 70 % of MLOs submitted renewals, representing an increase of 10% from the prior year.
  • 30% of reinstatement/late renewals submitted so far this month.
  • The DFI approved 230 company applications, 950 branch applications and approximately 3,300 individual applications.

Examination Update

The DFI also provided an overview of the following common violations found during examinations conducted of MLOs, mortgage brokers, residential mortgage loan servicers, and consumer loan licensees:

  • Failure to maintain records for 3 years.
  • Failure to date mortgage loan applications and/or complete required information.
  • Failure to maintain supervisory plans.
  • Failure to submit accurate mortgage call reports (“MCRs”) by certain mortgage brokers.
  • Failure to complete all required information on license applications.
  • Failure to report accurate information to the credit bureaus.
  • Failure to conspicuously disclose fees.
  • Failure to report mortgage loan payoffs by certain mortgage loan servicers.

Additionally, in response to an inquiry regarding the rating system used by the DFI in conducting examinations, the DFI explained that it uses a rating scale of 1 to 5, where 1 would be the best rating, and 5 would be the worst rating.

Enforcement Update

The DFI also provided an overview of complaints investigated by its Enforcement Unit during the last quarter of 2023 and identified certain common violations under Washington’s Mortgage Broker Practices Act (“MBPA”) and the Consumer Loan Act (“CLA”).

Specifically, the DFI indicated that it saw an increase in:

  • Instances where address locations of branches or companies were found to be changed and contact information changed without corresponding updates in the NMLS.
  • Complaints alleging unlicensed activity by loan modification companies.
  • Complaints alleging advertising violations, such as providing misleading information about interest rates by indicating that a loan is “interest free” without proper disclosure.

Further, with respect to unlicensed MLO activity, the DFI indicated that it examines the actual activity performed by the individual in question, and if the individual’s activity meets the definition of an MLO, then that individual has engaged in mortgage loan activity and must be licensed as an MLO.

Finally, the DFI indicated that its Enforcement Unit closed more than 950 complaints that resulted in (1) $80,000 in restitution granted to impacted consumers, (2) the postponement or halting of at least 10 or more foreclosures, and (3) the granting of several loan modifications.

Takeaway

Licensees under the MBPA or CLA are encouraged to review the issues identified by the DFI against their policies, procedures, and practices to ensure compliance with the requirements under the MBPA and/or CLA.

New Indiana Money Transmission License Requirements Impact Business Purpose Activities

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A&B Abstract:

On May 4, 2023, Governor Holcomb signed SEA 458, the Model Money Transmission Modernization Act (the “MTMA”), into law in Indiana. The MTMA repeals and replaces Indiana’s existing law on money transmitters and, in doing so, expands the definition of money transmission to include business purposes. The new law took effect on January 1, 2024.

The MTMA

The MTMA is based on the Conference of State Bank Supervisors’ (CSBS) endorsed model act (the “Model Act”) with a few modifications. The Model Act is intended to streamline the licensing process and promote multistate supervision. Around 25 states have at least partially adopted provisions of the Model Act over the past two years.  The MTMA adopts many of the Model Act’s provisions, including:

  • Definitions applicable to money transmitters.
  • Exemptions from money transmitter licensing.
  • Licensing process, including standardized determination of who controls a licensee and the vetting process.
  • Safety and soundness requirements, including net worth, bonding, and permissible investments.

Critically, the new definitions adopted under the MTMA are broader than Indiana’s prior law and encompass both consumer purpose and business purpose activity. That said, the MTMA is narrower than the Model Act in several respects. For example, under the MTMA, typical payroll processing activity may no longer be considered licensable activity, while entities offering “bill pay services” and those engaged in money transmission for jail or prison commissaries must assess whether a license is required under the MTMA. Indiana did not adopt the virtual currency portion of the Model Act and did not include the transmission of virtual currency in its regulation. In addition, the MTMA includes several statutory exceptions to licensure which are similar to the exemptions under Indiana’s prior law.

Licensure under the MTMA is required as of January 1, 2024. Applicants working toward licensure and compliance will have until June 30, 2024, to confirm submission of a completed application with the Indiana Department of Financial Institutions. Note that any late or incomplete applications submitted after June 30, 2024, will be considered delinquent.  Existing licensees need not reapply but must adhere to the MTMA’s new requirements as of January 1, 2024.

Takeaway:

Entities engaged in business purpose money transmission who have not previously been required to obtain a money transmission license in Indiana are strongly encouraged to review the MTMA and their business model to determine whether their business activities will require a license under the MTMA.

Majority of States Now Permit Remote Work for MLOs and Mortgage Company Employees

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A&B Abstract:

On June 9, Illinois became the latest state in a growing trend to authorize remote work for mortgage loan originators and mortgage company employees. This makes five states joining the list of jurisdictions legislatively permitting MLOs to work remotely since Montana enacted similar legislation in March, with more states expected during the 2024 legislative sessions.

The Illinois amendments to The Residential Mortgage License Act of 1987, signed by Governor Pritzker on June 30, 2023, take effect on January 1, 2024 and specifies requirements that licensed MLOs must follow to allow employees to work from remote locations. These changes include:

  • Requiring the licensee to have written policies and procedures for supervising mortgage loan originators working from a remote location;
  • Restricting access to company platforms and customer information in accordance with the licensee’s comprehensive written information security plan;
  • Prohibiting in-person customer interactions at a mortgage originator’s residence unless the residence is a licensed location;
  • Prohibiting maintaining physical records at a remote location;
  • Requiring customer interactions and conversations about consumers to be in compliance with state and federal information security requirements.
  • Mandating mortgage loan originators working from a remote location to use a secure connection, either through a virtual private network (VPN) or other comparable system, to access the company’s system;
  • Ensuring the licensee maintains appropriate security updates, patches, or other alterations to devices used for remote work;
  • Requiring the licensee to be able to remotely lock, erase, or otherwise remotely limit access to company-related contents on any device; and
  • Designating the loan originator’s local licensed office as their principal place of business on the NMLS.

Nevada, Virginia, and Florida passed legislation resembling the Illinois law, mandating similar security, compliance, and surveillance requirements.

Temporary Guidance Ending

Remote work flexibility is now the majority stance for the industry. The four states mentioned above are the most recent since Montana passed similar legislation in March. Of the 53 U.S. jurisdictions tracked by the Mortgage Bankers Association (including Washington, D.C., Guam, and Puerto Rico), 30 have implemented permanent statutes or regulations allowing remote work, with 9 more jurisdictions still operating under temporary guidance permitting remote work.

Of the states still operating under temporary guidance, Oklahoma’s guidance expires December 31, 2023. The state government will need to take further action, whether legislative or regulatory, to continue to allow MLOs to work remotely. Louisiana issued temporary guidance in July 2020, which would stay active, “as long as there is a public health emergency relating to COVID-19, as declared by Governor Edwards of the State of Louisiana, or until rescinded or replaced.” Governor Edwards ended the emergency in March 2022 when he did not renew the expiring order. Remote work in Louisiana is now operating in a grey zone with regards to whether the temporary order is still in effect due to the, “until rescinded” language.

Different Methods, Similar Results

Although remote work is the new norm, states are taking different routes to allow MLOs to work remotely. Many statehouses passed legislative statutes, which allow for stable policies but can be difficult to revise through the legislative process. These statutes tend to follow similar structures and have similar requirements. Illinois, Virginia, Florida, and Nevada require MLOs to work from home so long as certain records are not maintained in remote locations, professionals do not meet with customers outside of licensed facilities, employees are properly supervised as required by the license, and the company maintains adequate cybersecurity measures to protect customer data.

Nebraska’s state legislature did not pass specific guidance regarding remote work for MLOs, but rather, passed authorization to allow the Nebraska Department of Banking and Finance to promulgate regulations allowing remote work for MLOs. The Department has not yet issued permanent guidance for local MLOs regarding remote work requirements. Although using the regulatory system to implement rules may take longer to implement, it is also more flexible to changing circumstances and generally permits regulators to revise guidance faster than it takes a state legislature to convene, draft, and pass appropriate amendments to existing legislation.

Takeaway

The post-COVID workforce is clinging onto the last bit of convenience that the pandemic forced upon us. Surveys show that remote work flexibility is now the primary perk that would drive people to different employers. Since the technology needed to safely conduct business remotely is now proven, states are realizing that the easiest way to retain qualified mortgage professionals is to allow remote work flexibility. The American Association of Residential Mortgage Regulators (AARMR) expressed concern over a lack of remote work options in 2022 before states started passing permanent legislation. State legislatures embraced AARMR’s concern that a lack of remote work options could cause professionals to leave the industry, further widening the access gap for already underserved communities. The remote work trend has touched other industries that were previously in-person only and is likely to grow in those other industries (e.g., remote notarization) as far as practically feasible.

* We would like to thank Associate, CJ Blaney, for their contributions to this blog post.

Consumer Finance State Roundup

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The pace of legislative activity during this current year can make it hard to stay abreast of new laws.  The Consumer Finance State Roundup is intended to provide a brief overview of recently enacted legislation of potential interest.

Between the end of July and the first week of August, two states enacted legislation of potential interest to Consumer Finance ABstract readers:

  • District of Columbia:  Effective as an emergency measure from July 31 to October 29, 2023, B 25-357 (Act #25-0189), the “Public Health Emergency Credit Alert Emergency Amendment Act of 2023”, provides certain consumer protections to DC residents in connection with their credit reports under Section 28-3871 of the D.C. Code.  First, Section 28-3871(a)(1) requires a credit reporting agency to accept and include in the consumer’s file a personal statement provided by the consumer indicating that the consumer has been financially impacted by the COVID-19 emergency. Second, Section 28-3871(c) prohibits a user of a credit report from taking into consideration adverse information in a credit report that was a result of an action or inaction by the consumer that occurred during the public health emergency, if the credit report includes a personal statement in the form required by Section 28-3871(a).  Third, Section 28-3871(d) requires that an entity providing a credit report to a DC resident upon that consumer’s request (pursuant to 15 U.S.C. § 1681) must notify the DC resident of the right to request a personal statement to accompany the credit report.  Fourth, the emergency measure addresses the ability of the D.C. Attorney General to remedy violations, including through the imposition of penalties.  (We note that this measure includes provisions identical to those previously enacted by the D.C. Council on a short-term basis while it considers permanent legislation with the same effect.  B 25-358, a temporary measure that would extend the same provisions on a 225-day basis, is currently pending in the D.C. Council.)
  • District of Columbia:  Effective as an emergency measure from July 27 to October 25, 2023, B 25-363 (Act #25-0192), the “Foreclosure Moratorium and Homeowner Assistance Fund Coordination Emergency Amendment Act of 2023”, provides for foreclosure protections to certain DC homeowners.  For the period of July 1 through September 30, 2022, the measure protects homeowners: (a) who applied for funding from the DC Homeowner Assistance Fund (“DC HAF”) program prior to September 30, 2022; and (b) whose applications are under review, pending approval, pending payment, or under appeal.  The measure prohibits: (a) a lender or servicer from initiating or conducting a foreclosure action; (b) the initiation of a sale under the Condominium Act of 1976; or (c) the entry of a judgment foreclosing the right of redemption.  Second, on or after July 25, 2022, the measure prohibits a mortgage lender, condominium association, homeowners’ association, or tax sale purchaser, or an agent acting as a representative for any housing or financing entity of a homeowner, from commencing or proceeding with a foreclosure action until 30 days after sending the homeowner to warn of its intention to initiate or continue a foreclosure.  (Like B 25-357, we note that this measure includes provisions identical to those previously enacted by the D.C. Council on a short-term basis while it considers permanent legislation with the same effect.  B 25-364, a temporary measure that would extend the same provisions on a 225-day basis, is currently pending in the D.C. Council.)
  • Illinois:  Effective January 1, 2024, House Bill 2094 (Public Act 103-0292) amends the Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1) to address requirements for mortgage marketing materials from a mortgage company not connected to the consumer’s mortgage company.  Specifically, the measure adds new subsection 505/2AAA(a-5), under which:
    • No language may be used to state or imply that any response by a consumer who is not an existing customer is required … such as the use of the terms “urgent”, “action required”, “materials inspected”, “time sensitive”, or “important account information enclosed”;
    • The mortgage company’s name of the solicitor must be prominently stated in the body of the text, at the head of the letter or message in a font bigger than the body of the text, and on any envelope;
    • The mortgage company’s name of the consumer may not be used to state or insinuate in any way that the marketing material is from the consumer’s mortgage company rather than the solicitor’s mortgage company and is merely a solicitation;
    • The name of the consumer’s mortgage company must not be visible through an envelope window, appear on the envelope itself, or appear in an email subject line;
    • The text must clearly state if the consumer’s mortgage company had no part in helping the solicitor obtain the homeowner’s mortgage information.

A violation of the new subsection constitutes an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act.

  • Illinois:  Effective July 28, 2023, House Bill 2717 (Public Act 103-0322) amends two sections under the Mortgage Escrow Account Act (765 ILCS 910/1) with respect to higher-priced mortgage loans.  First, the measure amends Section 5 to clarify that a mortgage lender that complies with the escrow account requirements under 12 CFR Part 1026 for a “higher-priced mortgage loan” (as defined therein) is deemed to comply with the requirement under the section to notify a borrower about terminating or continuing that escrow account.  Second, the measure amends Section 7 to provide a borrower does not have the right to terminate any escrow account arrangement for a higher-priced mortgage loan, unless the borrower has met all the conditions for cancellation of an escrow account for a higher-priced mortgage loan under 12 CFR Part 1026.